Don’t Blame Your CFO if Progress is Slowing

By Wendell Brase, Vice Chancellor, University of California, Irvine and Chair, University of California Climate Solutions Steering Group
(This article appears in the April, 2011 issue of The ACUPCC Implementer)

Our progress seems to be slowing down or, worse yet, topping out! We are beginning to understand the necessity for major capital investment in order to attack the remaining nine-tenths of our carbon footprint. We need large-scale changes in the way we consume energy and source it.

How do we make the transition from fast-payback projects and low-investment behavioral changes to projects with sufficient scale to, say, cut our carbon footprint in half by 2020? Such a milestone would surely be consistent with our commitment to attain carbon-neutrality “as soon as possible.”

What can we do to foster the new thinking and ramping-up that needs to occur?

Educate students, faculty, staff, stakeholders, and governing board about the transition we need to make – ramping up from low investment projects and practices to major investments in our energy infrastructure. People have gotten comfortable with the idea that “sustainability pays for itself” because it does – in the initial stage when the money needed to reduce carbon was quickly recovered by energy savings.

So while the “pays for itself” notion may have helped us launch a reduction in carbon footprint, it may now actually impede progress. We therefore need to educate our colleagues and trustees in the reality that carbon emissions entail a cost. Of course, GHG emissions always exacted an “externality” cost that nobody paid, but only in the past decade have we come to realize how impactful this cost will be.

Develop a BAU (business-as-usual) cost model that projects future costs for energy, taking into account that utility investments replacing carbon-intensive generation will be lower-emitting but more expensive, whether your state has a policy that requires the generation portfolio to reach a certain percentage renewable or not. Also, at some point federal or state policy will place a cost on carbon, as has occurred in California already.

Educate your stakeholders that investment in lower (or zero) emission energy sources should be planned so as to anticipate and avoid future carbon costs in the BAU cost model – utility price escalation due to the factors just cited, emissions allowances, and purchased carbon attributes (to the extent that new investment and procurement strategies cannot attain carbon neutrality).

Thus, a shift needs to occur in the thinking of not only governing boards and institutions’ leadership, but on the part of everyone. The cost of carbon will grow to be significant, and it will affect everyone in our communities. And the substantial capital investments needed to move decisively toward a carbon-neutral infrastructure must be justified based on these future fiscal impacts, since they do not “pencil out” based on today’s costs. Widespread acceptance of the fact that carbon will, and should, entail a monetized cost will be a prerequisite for governing boards to make the investments in lower-carbon infrastructure, since parents, students, taxpayers, and benefactors to whom they are accountable will have to shoulder this cost.

Just how large will this investment be? I have seen a number of climate action plans (or supplemental analytic documents) that list carbon-cutting projects alongside rough cost projections. The capital investment per metric ton/year, whether due to demand reduction (energy-saving projects and actions) or source substitution (replacing existing thermal and electric energy with more carbon-efficient sources), ranges from a few hundred dollars to more than ten thousand dollars per annual MT of CO2e abatement. This wide range reflects early-stage vs. advanced-stage energy retrofit programs as well as wide variances in both the cost of power and its carbon-intensity from state to state. Even an early-stage retrofit program in a state where power costs well below the national average and emits carbon considerably above the national average will soon reach the point where a $1,000 capital investment is required to abate a metric ton (per year, ongoing). Of course, many climate action plans contain rough projections rather than fully developed models, and most express the hope that technology will move costs and feasibility in the needed direction before it is necessary to migrate from low-cost actions to costly investments.

These $1000-$10,000 projections do not reflect investments solely to abate carbon emissions, since they also lower utility bills by saving energy or by generating renewable or low-carbon energy. (Levelized cost per ton of carbon abatement is a more useful tool to compare GHG-reducing investments.) In California, looking at today’s energy costs — and not factoring-in anticipated GHG-related cost increases discussed above nor assuming any project subsidies – we can invest about $2,500 per ton of carbon reduction and break-even based on saved energy costs. Thus, a project that requires an investment of $3,000 per ton/year of carbon reduction will attribute a cost of $3,000-2,500 = $500 solely for carbon reduction. The line that splits the investment cost of an energy project between energy cost savings and carbon abatement cost will vary based on regional energy costs and carbon costs, of which none is expected to remain static.

The reason we are all approaching a fiscal “cliff” is that, regardless of the split between energy cost savings and carbon abatement costs, many institutions are planning to invest $1,000-$10,000 per ton of carbon emissions. Suppose the ultimate number is midway between these rough projections: $5,000/MT. A college or university with a 100,000 MT scope 1+ 2 carbon footprint can expect to invest half a billion dollars, and still face the prospect of buying annual offsets for scope 3 emissions. (100,000 MT is a round number from which you can readily index upward or downward for your own institution.) Optimistically, if the performance/price ratio for renewable energy doubles, such an institution might be able to abate its scope 1+2 emissions for a quarter of a billion dollars.

These massive, sobering numbers bring into focus the scale of investment that will be necessary to make a serious attempt at carbon-neutrality. These numbers reveal why urging CFOs to “get creative” and to “find new financing tools” will not really address the problem. Nor can we point the finger at governing boards, for they are in no position to approve the investment and associated debt needed to approach climate neutrality without the broad support of all those who will bear the cost. This means that our job description and our message are about to change, in the ways outlined above. Leadership that is collaborative, extending across all signatory institutions, will be needed.

We’ve moved!

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